Q3FY20: Earning expectation of Banks

The third quarter of FY20 will bring some relief for the banking sector in India, thanks to the strong recovery led by NCLT resolution of some of the major companies. Essar Steel and Ruchi Soya saw a resolution. Some of the power projects, such as Prayagraj, Korba West, and Rattan India, also witnessed a resolution in last quarter. Nevertheless, a part of this will be offset by slippages mostly from the corporate (DHFL) and already classified watch lists. Hence, the credit costs of banks is likely to remain elevated as banks look to increase their provision coverage ratio and incorporate divergence report (SBI, BOB, and Yes) in the quarter.

Net interest income growth is likely to remain in a higher single digit or a lower double digit. Lower growth will be due to moderation in credit growth. Credit growth moderated to 7.1 per cent in the third quarter of FY20 against 15 per cent in the same quarter last year. This credit growth driver will be a retail book, which may remain strong and will show a rise in higher teens. The corporate growth is likely to remain muted at and below 5 per cent.

When it comes to the net interest margin, it is likely to remain stable, as various public sector banks have cut their MCLR by 10‐15 basis points on average in the last quarter. Nonetheless, the reported margin is likely to be greater on higher interest income on recovery.

In terms of the type of owners, private sector banks will continue to show better performance compared to state owned banks. HDFC Bank, Indusind Bank, and Kotak Mahindra Bank are likely to show better credit growth while Punjab National Bank, Bank of Baroda, and Canara Bank are likely to remain below average.